A Demand System Approach to Asset Pricing

2018/11/14 by Ralph S. J. Koijen, Motohiro Yogo · 650 citations
Economics, Econometrics and Finance · #Arbitrage pricing theory #Asset (computer security) #Capital asset pricing model #Computer science #Consumption-based capital asset pricing model #Econometrics #Economics #Endogeneity #Financial Markets and Investment Strategies #Financial economics #Housing Market and Economics #Microeconomics #Monetary Policy and Economic Impact #Portfolio #Stock (firearms) #Volatility (finance)

paper · doi:10.1086/701683

published in Journal of Political Economy 127(4), 1475-1515 (University of Chicago Press)

openalex publication_date 2018/11/14 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/06

Abstract

We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets’ own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using US stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.

Citations

• Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition
• Risk, Return, and Equilibrium: Empirical Tests
• An Intertemporal Capital Asset Pricing Model
• Does Arbitrage Flatten Demand Curves for Stocks?

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